The Failure of Cross-country Regression Analysis in Measuring the Impact of Foreign Aid

Abstract

Foreign aid is publicly motivated by a moral obligation to help the poor and develop underdeveloped countries. Despite the vast amount of foreign aid spent annually to address the poverty of millions of people and the economic decline of underdeveloped countries, very little headway has been made. First, this article argues that aid does not work in isolation and many variables influence growth and development and thus the impact of foreign aid; and second that cross-country regression analysis is an inappropriate method to measure the effectiveness of aid. It emphasizes that the methodology used to measure the impact of foreign aid is too generalist. It concludes that foreign aid cannot be treated as a homogenous entity that works equally in all countries in all types of environment and across all times. There is an urgent need to develop a new methodology for measuring the effectiveness of foreign aid.

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